Limited partners are driving big changes to their private equity portfolios in response to new economic realities and dramatic falls in their overall returns from the asset class, according to Coller Capital’s latest Global Private Equity Barometer.
The proportion of LPs who have made lifetime portfolio returns of ten per cent or less from private equity has jumped to 51 per cent from 22 per cent in 2008 and 29 per cent in 2009.
Despite this drop in returns, investors have not lost faith in the asset class. The proportion of LPs planning to increase their percentage of assets allocated to private equity in the next year is greater than those planning to reduce it (20 per cent vs 13 per cent).
This reverses the situation last summer, when, for the first time, there was a greater proportion of LPs planning to reduce than increase their allocation. Two thirds (64 per cent) of LPs also expect their pace of new commitments to accelerate over the next 18 months.
However, how and where LPs make private equity commitments will change rapidly in the next two to three years.
Two fifths (38 per cent) of North American LPs plan to reduce their number of GP relationships over the next two years. One fifth of European and Asia-Pacific investors also plan reductions.
Investors are also accelerating their direct investment programmes. Half (49 per cent) of LPs currently make investments directly into private companies, and around half of these do so on a proprietary basis (i.e., not just through co-investment programmes). However, 41 per cent of all private equity investors plan to expand their direct investment into private companies over the next three years.
LPs are also planning very significant increases to their Asia Pacific exposure in the short term. The proportion of European LPs with more than a tenth of their private equity exposure in the Asia Pacific region will rise from 16 per cent of LPs today to 38 per cent within three years. For North American LPs the percentages will be 41 per cent of LPs in three years’ time (up from 26 per cent today), and for Asia Pacific LPs it will be 87 per cent of LPs in three years (up from 69 per cent today).
Jeremy Coller, chief investment officer of Coller Capital, says: “It’s natural to ask why investors are maintaining or strengthening their commitment to private equity after a big fall in their returns. The simple answer is that private equity investment is a demonstrably skill-based activity – for LPs and GPs alike – and the credit crunch and recession have been a useful, if painful, learning experience. Limited partners, for their part, will have learned many invaluable lessons from the downturn, not just about which GPs have the requisite skills, but also how and where those skills can best be deployed.”
